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Last week Woolies released their 20-week trading statement, which as expected showed that they are under pressure. Their most important division from a profit margin perspective is what used to be called 'clothing and General Merchandise' and now is called 'Woolworths Fashion, Beauty and Home'. The division declined on a like for basis by 2.4% for the period.
Their food division, which I am a huge fan of, had a positive period with like for like sales increasing 5.3%. Unfortunately for the group, the operating profit margin in the food division is around 7%, and the operating margin for clothes is around 17%.
David Jones had a tough time as they transition to their new business model, like for like sales were down 5.3%. A key contributor to the drop in sales is the revamp of the David Jones flagship store. The pictures I have seen look amazing; the goal is to make shopping there an experience.
The second most profitable division, Country Road, had mixed results. They saw like for like sales down 0.4% but they gained market share and overall sales were up 8%. I will be interested to see if they have given up margin to gain market share. In their full-year results, Country Road had an operating margin of 10% with management pegging their medium-term target at 12%.
All in all, David Jones contributes 28% of Woolies profits, it's their biggest division. The newly named 'Woolworths Fashion, Beauty and Home' coming in second with around 24% of the profit. Because David Jones is struggling to turn around, the market is feeling down on Woolies, only giving it a P/E of 13. Compare that to Shoprite on a P/E of 21 and Pick'n Pay on a P/E of 25. There is no doubt that the Woolies share price going forward is very much tied to the fate of David Jones. If management gets the turnaround right you will see Woolies re-rate to a P/E around 20, which would mean the share price going up 50% without any increase in the underlying profit number. For now, the share price probably won't do much in the short term.